Greek yields down, stocks up as Athens backs off debt writedown

LONDON: Greek bond yields plunged and stocks rallied on Tuesday as the new government in Athens appeared to soften its stance on a debt writedown with proposals for a new debt swap.

Meeting investors in London on Monday, Finance Minister Yanis Varoufakis proposed ending a standoff with creditors by swapping the debt for growth-linked bonds, and reassured private investors that they would not face losses.

While Varoufakis later said he had been misinterpreted, he was widely reported in Greek media to be backing down from the anti-austerity government's pledge for a debt haircut.

"Up to this point, there clearly has been a very robust demand from Greece that there will be an official sector haircut. Weakening those demands is an important step towards finding a compromise," said Mark Dowding, a senior portfolio manager at BlueBay.

Yields on 10-year bonds fell over 100 bps to 10.38 percent, on track for their biggest fall since 2012, while yields on debt in Portugal, Italy and Spain fell between 5-10 basis points.

Athens' benchmark stock index gained nearly 9 percent, buoying other European shares.

Even the news that three of Greece's four major banks had started to tap emergency funding from the central bank did little to dampen investor spirits, with the country's bank index up around 18 percent.

There were also signs on Tuesday of possible reciprocal concessions from Greece's international lenders.

German daily Handelsblatt reported on Tuesday that the European Central Bank and the IMF may leave the "troika" of lenders that governs Greece's bailout.

"The level of noise is actually coming down a bit and a bit more compromise being shown on both sides," said Michael Krautzberger, head of European fixed income at BlackRock.

Greece's short-dated yields, which shot up during the latest political upheaval, came crashing back down on Tuesday. Three-year bond yields fell over 200 bps to 17.83 percent, while five-year yields were down over 150 bps at just below 14 percent.

But not all investors are confident that the conciliatory tone coming from Athens will be enough to convince the broader institutional investor community to restore Greek sovereign debt to their portfolios.

"We want to see a situation where the Greeks strongly affirm their motivation and commitment to remaining in the euro zone ... then we know the European Central Bank will support them," said Olivier de Larouziere, head of rates at Natixis Global Asset Management.